Monday, October 24, 2016

(打造高效可持续增长基础重塑系统需公平竞争)夏伟文 & 陈薛卉 (20 June 2016)A barren land may
produce few big trees but not a forest. Malaysia has a world badminton champion
in Datuk Lee Chong Wei but didn’t have enough champion players to make a world
champion team. One dominant reason for this is the “system”. Portugal and
Argentina may have Ronaldo and Messi winning the world best player award for
record of times but it is the German system that produce enough talents and
good fundamental (include technical expertise and teamwork) to perform
consistently at highest level and then, finally won the football World Cup.

Therefore, the
foundation of high and sustainable economic growth should be good system in
every aspect. In November/December 2014 article in this same column, we
proposed a new analysis model as in Figure 1. As we can see, the “system” plays
critical role as catalyst or platform to enable development for “human”, “science
& technology” and “capital”. The “system” is akin to “soil, environment and
root”. If it is good, it will grow strong branches in the form of “human”,
“science and technology” and “capital”. Those branches will bear fruits of
economic growth.

Figure 1: Four Economic Triangles

Unfortunately, some of main systems we are using now
are ineffective, thus did not provide good platform for holistic and
sustainable growth. Two aspects need foremost attention for remodelling. They
are (i) the needs to induce fair domestic competition and (ii) reduce big
government systems (will not be discussed here).

Fair competition within
New Economic Policy framework

Officially, New
Economic Policy (NEP) has ended in 1990 after a lifespan of 20 years. Subsequent
policies are like “old wine in new bottle”, which make NEP like never ended.
NEP has two main objectives which can be considered as “practical” rather than
“racist”. It first objective aimed to eradicate poverty irrespective of races.
The second objectives is to restructure Malaysian society to reduce identification of race from economic
function with the purpose that Malays and other indigenous groups play full
role in all aspect of economic function. This second objective is actually fair
despite look like bias to Malay group. In general, the NEP (as well as any
other affirmative policy in other countries) is actually based on Rawlsian
welfare principle to maximize the welfare of the least well-off members, which
in Malaysia case is the Malay group. With an extra push from privatization
during Mahathir’s era, NEP successfully eradicated overall poverty and uplift
Malay and indigenous group’s welfare, income and involvement in the economy.
Thus, income distribution becomes fairer and the economic growth became
healthier.

Taking
a neutral and academic point of view, the problem of NEP (the Rawlsian-based
system) is its longevity. Giving “unconditional” advantage with no expiry date to
the least well off group will cause dependency. Dependency comes with (i)
expectation that the advantage will be forever coming, and (ii) fear of losing
everything if this advantage is gone. These will lead to slower improvement in
productivity, cause misallocation of resources and give chances for political
manipulation. The important thing here is NOT asking for completely removal of
these advantages but to at least make it “conditional”, which is competition
and synergy cooperation for both intra and inter groups.

A
historical case of affirmative policy during the Germany re-unification in 1990
can be used as reference. During that time, Eastern Germany was ways behind
West Germany. Robert J. Barro (Professor of Economics in Harvard University) in
his book “Nothing is Sacred (2003: 95 - 101)” highlighted that Eastern Germany
was given a lot of advantages. These advantages include a one-to-one currency
conversion rate, taxing the West to aid the East development programs and
wage-equalization effort. Like Malaysia, both are Rawlsian welfare system. As
results, wage and salary payments per worker in eastern region (exclude Berlin)
increased from 49% of the western region (include Berlin) in 1991 to 75% in
1995 and 77% in 2000.

However,
productivity (measure in “gross domestic products per worker) grew much slower.
In 1991, eastern region’s productivity is 31% of the western region. It only
grew to 46% in 1995 and 48% in 1997/98. Meanwhile, between 1992 to early 2001,
unemployment rate in the eastern Germany is about 6% to 8% higher than western
region. In addition, Barro also criticized the Germany government’s transfer
and subsidized policies (welfare system) that retarded migration from east to
west. He believed more westerner working in the higher productivity environment
of the west would be better.

These
reflect that wages convergence can be forced through government policies but it
cannot improve economic fundamental, which in this case are high productivity
and low unemployment. It is like the government planting an adult tree in an
unfertile land and hope the tree will grow healthily ever after.

Back to Malaysia,
advantages in the name of welfare should not be overly-extended to the less
productive people (regardless of race) and low value-added industries or
economic sectors unconditionally as it may retard the country’s long term productivity
growth. Others programs like Bantuan Rakyat 1Malaysia (BRIM) that did not help
in increasing productivity or economic efficiency should be stopped. Education
scholarship, research grant, entrepreneurship grant and others financial
support should be given to the needed but by merit.

Figure
1: GDP per person employed Gap (Malaysia vs. Singapore) (%)

Note: Data sourced from
World Bank. The number represents percentage of different (Singapore minus
Malaysia) divided by Malaysia GDP per person employed.

There is no data on GDP
per person employed (proxy to productivity) for both Malaysia and Singapore prior
to year 1991. However, the trend after 1991 in Figure 1 implies that (i)
Singapore’s productivity is way above Malaysia, and (ii) Malaysia’s
productivity was very vulnerable (drop drastically) during crisis years like
1997/98 to 2000 and 2008 to 2010. Throughout those years, every worker in
Singapore produces about 2.5 times to 3 times more output than workers in
Malaysia.

Figure
2: GDP per capita Gap (Malaysia vs. Singapore) (%)

Note: Data sourced from
World Bank. The number represents percentage of different (Singapore minus
Malaysia) divided by Malaysia GDP per capita.

Figure 2 reveals
equally embarrassing comparison. The different between Singapore’s GDP per
capita goes up to 400% of Malaysia GDP per capita. In another words, average
output per Singaporean is five times every Malaysian. Thus, what can we say
about the long-term effectiveness of our affirmative policy and other development
plans?

Solutions

Two simple solutions
may be applicable. First is promotes fair competition in everything from
government’s welfare support and procurement to providing business opportunity.
Even with protective privilege to the Bumiputera group, creating competition
within them may be very helpful in increasing efficiency and productivity. Same
can be applied to protect domestic infant industries from foreign competition
but at the same time promote domestic competition. United States, Japan and
South Korea did practiced protectionism economy before their industries become
strong. Yet, very fierce domestic competition existed to ensure rapid growth of
strength. History has proven this solution. Malaysia protects domestic
industries but lack of competition. Can our airline, automobile and
telecommunication compete with foreign companies?

Second proposed
solution looks weird but seems indirectly worked well in United States. It is
to legalized abortion. Since 1991, homicide and violent crime in United States
has fallen dramatically by 44% each. Rate for property crime has also reduced
by about 50%. Research study by John Donohue (Stanford Law School) and Steven
Levitt (University of Chicago) found that legalization of abortion in the
1970s. The logic is that “those children who were not born (abortion) would
have been more likely to grow up in poverty and on welfare with a young and
poorly educated single parent” (see Barro, 2003: 74 – 77). These unborn
children would have been prime candidates to be criminals fifteen to twenty-five
years later. Hence, their absent would contribute in drop of crime rate and
perhaps also reduce government’s social welfare burden and improve overall
productivity. There will be lots of debates on humanitarian ground versus
practical needs.

Summary

Competition may be
cruel. Only the fittest is to survive but this is the best system for
civilization to grow and prosper. Even human genetic will automatically select
the best gene to ensure our survival and growth. On the other hand, mercy is
needed to correct the initial imbalances of strength. Helping hand (affirmative
action) ensures the weak ones to grow strong one day and provide fair
competition to the rest. Yet, beware that if we give unlimited mercy on the
weak ones, we are also taking away their incentive and urge to improve.

Imagine there is a
father who always gives allowance money to his son. Due to his son profuse
spending, the son asked for more money from his father. Do you think it is
right for the son to ask for more money? Yes, only if the allowance is too
little for survival. What make no sense or cause anger is not the demand for
extra allowance but the profuse spending.

Applying the story to
Goods and Services Tax (GST) issue, the “father” is the citizen. The “son” is
the government while the “allowance” is tax. Government has it logic to claim
that current base of tax paying citizen is too small. In February 2014, Prime
Minister Najib Razak announced that only one out of ten Malaysians pay their
taxes. This portion is considered “too little for survival”, especially to
rectify decades of budget deficit.

However, what anger the
Malaysians is the “profuse spending” of the government. Rampant report of
corruption (which is a leakage of fund) and inefficiency in public sector added
to call for to stop the wastage first before implement more taxes. Malaysians
also worry and sceptical on whether the extra revenue from GST will be wisely
used or not.

Let’s continue with the father-son-allowance
story. After the son get the extra allowance (GST) from the father, the son
still not satisfied. Citing that scholarship (oil revenue) has decrease, the
son announced reduce caring effort (budget cut) to the father. Will this be
acceptable?

In between its
implementation on 1st April 2015 to 31st December 2015,
over RM27 billions of GST revenue was collected. Surprisingly, this extra
revenue is seen as not enough to fight drastic drop of oil revenue due to
global oil price slump. In January 2016 during the recalibration of Budget
2016, Prime Minister Najib Razak announced that Malaysia’s oil revenue fell
closed to RM14 billion. Simple maths will give you a net RM13 billions from GST
extra revenue minus loss of oil revenue. This make extra budget cut not
acceptable and sceptical. Where are the revenues from GST?

Brief
Recap

From a high of over USD
100 per barrel, crude oil dropped to a low of USD 26 per barrel before rebound
to around USD 40 per barrel after Saudi Arabia and Russia co-operate for a
supply restriction. Subsequently, government of oil exporting countries include
Malaysia announced painful budget cut. Reason given is drastic drop of oil
revenue.

In wake of high federal
government debt and reduced revenue from Petronas oil loyalty/dividends, Malaysian
government adjusted its fiscal policy. Good and Services Tax (GST) was
introduced a year ago. Despite some havoc in its initial implementation, GST
brought in higher than expected revenue to the government. It also successfully
increase tax based (percentage of people paying tax) in Malaysia. Nonetheless,
there are some drawbacks. Its implementation is messy and costly. GST burden
the low and middle income consumer groups. People still doubt that government
will use the extra GST revenue wisely.

Despite many viewed GST
as “bad”, it is still a needed long-term fiscal adjustment to increase revenue
to eased huge budget deficits and debts. Thus, the “bad” should be restricted
to the two things mentioned, namely (i) more tax revenue from GST may encourage
more wastage from inefficiency and corruption, and (ii) the extra GST revenue
may not be wisely used.

In Malaysia context, some
called this twin fiscal adjustments (GST and budget cut) a “needed daring” move
in current unfriendly global economic scenario but some criticized it as “wrong
desperate” choice. Some think it is a “no choice” for the government.
Nonetheless, it is not “my choice” for most consumers. While GST is a “short term
pain, long term gain” (if its revenues are utilized wisely), budget cut,
especially in education and healthcare sector is reversed – a short term gain
but long term pain.

Education
and National Productivity

Academician or
administrator in Malaysia education sector may have realized the extent of
inefficient in our education system. Relatively low world universities ranking
and bad Program for International Assessment (PISA) results merely a
confirmation of our deteriorating education standard. All these are after
decades of efforts, plenty of resources (from budget allocations and private
investment) and overwhelming regulations/quality assurance (from Malaysia Qualification
Agency, MQA) to boost our education standard.

What will happen if all
those mentioned are suddenly reduced due to budget cut with no appropriate
fundamental reform? As compare to Budget 2015, Higher Education Ministry
suffered budget reduced by RM2.4 billion to RM13.378 billion. Public
universities’ funding is to be reduced by RM1.442 billion. Universiti Malaya believed
to has the most severe cut of 27.30% while Universiti Utara Malaysia is 19.31%,
Universiti Sains Malaysia is 17.14% and Universiti Teknologi Malaysia is
16.53%.

As results from the
allocation cut, various public universities in Malaysia have stopped their
subscription to journal databases. Both public and private education
institutions are also getting less research grants from the government. These
greatly hamper research capability for academicians and deprive students of necessary
education materials (subscribed online journals and books) and various tools
for scientific research.

Less optimistic on
current economic scenario plus increase cost due to GST have discouraged
business sectors to give funding or sponsorship to private education
institutions. Fierce competition in private education sector has driven down
profit margin and students’ intake. This may (or already) cause rounds of cost
cutting measures from less sponsorship for conference and scholarship to even stop
supplying toilet papers!

The government and
relevant stakeholder should understand that research and teaching are important
source for productivity growth. Productivity is important source for economic
growth and sustainability. Economic growths that based on increase in production
inputs are not long-lasting. Increase in productivity (technology progress)
through education, research and innovation is long-lasting. Asian Miracle
during the 1990s is a good lesson to learn.

Asian
Miracle Lesson – Perspiration vs. Inspiration

South East Asian and
South Korea continuous very high economics growth for years had been dubbed as
“Asian Miracle”. However, Paul Krugman (Economic Nobel Prize) revealed that
those “miracle” were actually due to rapid increase in population growth. He
cautious us that the miracle will not last because total factor productivity
(TFP) for those countries has been stagnant or even decline slightly.

The moral of the
Krugman story is Asian countries use “perspiration” (hard work) to growth while
developed Western countries use “inspiration” (innovation/technology
progress/productivity) to growth. Perspiration is not lasting and less
impactful. Inspiration needs consistent investments in education, research and
development especially in science and technology areas. Not only investment in
term of money is important, great political will is also needed in providing resources
and fostering the spirit of innovation.

A sudden cut in budget
on education sector will deprive needed funding. It also gives bad impression
that education is not important in national agenda. Once our momentum towards
improve productivity through education, science and technology improvement is
stopped, it is hard to kick it back to high speed level – it’s a Newton’s
scientific law of moment. Hence, should the government risk of long term pain
for short term gain?

Healthcare
– Public Amenity vs. Private Initiatives

Healthcare is one of
twelve “National Key Economic Areas” (NKEA) in Economic Transformation Plan
(ETP). Forty projects are announced and private investments are encouraged to
participate and collaborate with public sector. All these plans are announced
in September 2010 when oil price was strong while existing debt and continuous
budget deficit are still not a big issue.

In January 2016, budget
for Health Ministry is expected to be reduced by 10% or between RM250 million
to RM300 million. Health Minister is optimistic that budget cut will be counter
with increase in efficiency in health sector at various levels. Nonetheless, budget
cut in healthcare trigger many alarming questions. For example, will budget cut
in healthcare jeopardize or at least delay the ETP progress? Will the citizens,
especially those who are depending on public amenity (like public hospital)
suffer due to lesser allocation to public healthcare? Can the private sector
fill the gaps left void by public amenities? How about the different of cost
for healthcare services between public and private providers? All these
questions need detail data and information to answers. Ineffective, costly and
secretive nature of information regarding public sector hamper debate and
discussion to find precise effect and alleviation methods to safeguard public
welfare after budget cut.

Nonetheless, one aspect
needs serious attention – low expenses on insurance means that dependency on
public healthcare or “god blessing for good health” are still crucial. In the
United States, the Affordable Care Act (more famously known as “Obama Care”)
defines affordable health insurance as cost less than 8% of your annual
modified adjusted gross income after subsidies. If their citizen can’t find a
plan that will cost less than 8% of their family’s income, they won’t be
required to have insurance starting in 2014. However, most Americans
shopping in the private market will be able to find an affordable insurance
option.

How about Malaysia?
Affordable insurance options are widely available. Unfortunately, willingness
to spend on insurance is relatively too low as shown in Table 1. Despite
increased 1.5 percentage points from 1990 to 2014, Malaysia most insurance
expenditure as percentage of Gross National Income (GNI) in 2014 is only 4.4%,
which is about half of the standard required by Obama for United States. While
there are effort and progress to expand private insurance sector in Malaysia,
it take time and changes of Malaysians’ mind-set towards acceptance of
insurance as an important element in their life and financial planning. Before
we reach United States or developed countries level, budget cut in healthcare
most likely will give significant negative impact to its citizens.

Table
1: Insurance Expenditure as percentage of Gross National Income (GNI)

Year

1990

2006

2007

2008

2009

2010

2011

2012

2013

2014

Premium (% of GNI)

2.9

4.5

4.3

3.8

4.4

4.3

4.2

4.4

4.4

4.4

Life (% of GNI)

1.5

3.1

3.0

2.6

3.0

2.9

2.6

2.8

2.8

2.8

General (% of GNI)

1.4

1.4

1.3

1.2

1.4

1.4

1.6

1.6

1.7

1.6

Conclusion

Reform in budgeting
strategies has been long overdue. Implementation of GST is a short term pain
but promise a healthier fiscal strength to the country. Yet, its implementation
is disappointing. Its benefits could be dwarfed by big amount of seemingly
unstoppable wastage in government spending. In contrast, government’s response
to reduced revenue from global oil price slump by cutting budget is a short
term gain but long term pain. This is especially cut in allocation in two
critical sectors, namely education and healthcare.

Another two
obstacles towards achieving people economy highlighted by Dr. Robert
Pollin are (iii) controlling
inflation and (iv) countering the pressures resulting from globalization, including
the trade deficit, immigration and managing foreign exchange. Implementation of
Goods and Services Tax (GST) and continuous depreciation of Ringgit would
likely to cause cost-push inflation and import inflation. Globalization and
liberalization of financial sector have already altered many economics
theories. The United States’ Trans-Pacific Partnership Agreement (TTPA) and
China’s “One Belt, One Road” Initiative will bring impact to Malaysia but
unsure for good or bad. These challenges are like waves of tsunami that can
easily drown an emerging economy like Malaysia.

Controlling
inflation

Malaysia’s
official consumer price index (proxy for inflation) averaged about 2.25% in a
period of 15 years from 2000 to 2015. The inflation rate looks small and
smaller than the growth rate of nominal Gross Domestic Products (GDP) (see
Figure 2) for most of years since 1961. Is there a problem? Let look at the
practical aspect as follow.

A pack of nasi lemak sold at RM1 in 1999
(sometimes can get it from as low as at RM0.60 during those years). Take that
price and times with 1.0225 every year until 2015. This is known as
“compounding” and it is easy to calculate with Microsoft Excel. You will get
about RM1.40 per pack at 2015. A cup of Chinese tea for 30 cent in 1999
theoretically should sell at 40 cent. In city or highly populated area (usually
university and commercial office area) the prices are much higher. In Bandar
Sungai Long where a popular private university is located, Chinese tea is
selling as high as 70 cent!

Figure 2:
Malaysia Inflation and GDP per capita growth

(Data sourced from World Bank)

Worst case is
housing price versus salary. A normal (about 1400 square feet) double story
link house of RM250,000 in 1999 compounded at 2.25% annual inflation should be
sold at RM357,000. Now, such price will not get you the double story link house
especially in urban area. Price of a comparable house can go until RM600,000 to
RM800,000 in Kajang and reach RM1 million in highly populated area like
Petaling Jaya. A fresh university graduate can get RM2000 to RM2500 per month
salary in 1999. Theoretically with 2.25% compound inflation, they starting
salary now should be about RM2900 to RM3600. Is there any company willing to
pay that salary to a fresh graduate? Then, can university graduates afford to
own a house? This is impossible especially if they need to first buy a car to
enable them to go to work unless they have rich parents or exceptional talent. Do
not forget the cost of food and other living expenses also increased.

Pensioner
will find their saving depleted fast through inflation and weakening of
Ringgit. Middle class citizens, who spend heavily including overseas trips and
imported goods also suffered. Parents who need to send their children to study
overseas or at least bought imported textbooks need to fork out more expenses. Therefore,
is “people economy” going to exclude the welfare of youthful fresh graduates
and old pensioners?

Depreciation
of Ringgit benefits export-oriented businesses most due to higher price
competitiveness that more than offset higher costs of production due to
inflation of inputs cost. However, how large is this benefit from increase
export versus the burden of all citizens to pay higher price for imported
goods? Will benefit to export business trickle-down to overall society?

Inflation is
getting harder to control after GST and huge currency depreciation causing
hardship to almost all levels of society. If social welfare is negatively
affected, is the country still rightly moving towards people economy?

Countering
the pressures resulting from globalization

Nowadays,
what happened in other countries is no longer “none of our business”. What
happened in financial market may affect foreign exchange and real sector as a
result of globalization, liberalization and digitalization. Major international
development affecting Malaysia are Trans-Pacific Partnership Agreement (TPPA)
and China’s “One Belt, One Road” initiative.

Exclusion
of China, the largest economy in the Pacific Rim region in the TPPA is greatly
disturbing. Center for Research and Globalization (Canada) is concerned about
TPPA’s strategic policy function. Is TPPA being used to harness the power of the developing nations
throughout ASEAN as an economic counterweight to Beijing for the benefit of the
United States? The research center also highlighted two matters which could be
the biggest challenges for Malaysia policy makers as follows.

(a) TPPA has Investor-State-Dispute
Settlement (ISDS) mechanism, which would allow corporations to seek restitution
against states in an international arbitration court for the contraction of
their potential future profits as a result of government regulations. In
another words, Malaysia’s government can be sued and needs to compensate
foreign corporations for any policy to protect the interest of local
industries. Subsidies for welfare of the poor can be deem “unfair competition”.

(b) On human health
and well-being, TPPA urges for (i) unimpeded entry of genetically modified
products into domestic markets, (ii) gradual elimination of tariffs on
alcoholic beverages and tobacco, (iii) drastic extension of patents on
pharmaceutical products that will impede access to affordable medicines and
(iv) require Internet Service Providers (ISPs) to more actively monitor users
to enforce copyright protections at the expense of individual privacy. All
those examples are what Malaysia cannot (and should not) do all these years.
Are we going to chance and scarify the welfare of the people just to join an
international trade agreement?

Historically, on January 2009, Malaysia has
suspended negotiation of Malaysia-US Free Trade Agreement (that started in 2005).
Despite official reason for suspension is United States supported invasion of
Gaza by Israel, the real reason could be many demands of the trade agreement
that conflict with Malaysia’s national interests. If it is like that, what
reason for Malaysia to agree to TPPA? Indirect conflict between TPPA and
China’s “One Belt, One Road” remind us of cold war
between United States and Russia. Therefore, it may create unpleasant
relationship between Malaysia and China if we join TPPA.

Like
TPPA, China’s “One Belt, One Road” initiative also
posses challenges. A simple Google Image search for “New Silk Roads” will show
the Economic Belt involving physical roads or railways through northern China
to Middle East before links to Moscow and Europe (Turkey, Rotterdam and
Venice). Meanwhile, Malaysia’s main export and import destinations in 2013 are
Singapore, China, Japan, United States and Thailand. Thus, major nations
(except China) that “New Silk Roads” passes through are not much relevant to
Malaysia’s international trade. However, “One Belt, One Road” initiative gives
opportunities as well as challenges in term of China’s investment inflow to
Malaysia.

Based on Malaysian Investment Development
Authority (MIDA) statistics in Table 4, China (exclude Hong Kong) is fifth
largest foreign direct investment (FDI) inflow country in Malaysia. Will
China’s and Hong Kong’s FDI inflow increase drastically if Malaysia’s trade and
foreign policy pro-China rather than pro-United Stated?

Besides
international trade, Malaysia also facing challenges in the aspects of digital
globalization, international migration (includes brain drain and political
refuges), possible global economic crisis and extremism/terrorism. Each of
these could bring deadly effect to Malaysians and therefore our path towards
people economy.

Conclusion

Inflation and
globalization are twin challenges Malaysia facing domestically and
internationally. As harvest will only comes after hard work of planting,
overcoming challenges can brings positive effect. Yet, we need to first
understand what are the challenges or obstacles along our path towards people
economy.